High returns, low risk? How to read a private investment pitch

Sooner or later, someone will offer you an investment that isn't sold on a stock exchange. It might be a private mortgage pool, a share of a real estate development or a loan to a growing business. The pitch often sounds the same: steady returns well above what a bank pays, backed by something solid like property.

Some of these deals are legitimate and well run. Others aren't. Here's how to tell the difference before your money is involved.

Rule one: higher returns always mean higher risk

If a deal pays much more than safe options like government bonds or bank deposits, the extra return is payment for risk, whether or not the pitch mentions it. The risk might be that the borrower can't repay, that the project runs over budget, or that you can't get your money out when you want it. "High return, low risk" is a warning sign, not a feature.

Questions to ask, and the answers to watch for

• Is the seller registered? In Canada, check the National Registration Search on the Canadian Securities Administrators' website. In the U.S., use FINRA BrokerCheck or the SEC's search tools. An unregistered seller is a serious red flag.
• What exactly do I own? A share, a loan, a mortgage? Ask for it in writing.
• What happens if the project fails? Who gets paid first, and where are you in that line?
• Can I get my money out early? Many private deals lock up your money for years.
• Who checks the numbers? Look for audited financial statements and independent valuations, not just the promoter's own figures.
• How is the seller paid? Large commissions can push people to sell deals that don't suit you.

Pressure is part of the pitch

Be wary of urgency ("only two spots left"), exclusivity ("we don't offer this to the public") or social proof ("all the smart investors are in"). Legitimate opportunities can wait a week while you get advice.

Keep it a small slice

Even if a private deal looks sound, many advisors suggest it should only be a small part of your overall savings, money you could afford to have tied up or lose without changing your life.

Before investing in anything private, have an independent professional who earns nothing from the sale read the documents with you. It's one of the cheapest forms of insurance you can buy.